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# The Bull Case on Uranium

## Issues to be addressed in this paper

Uranium, the most common fuel type being used in nuclear powerplants, has been in a near-constant bear market since the global financial crisis in 2007-08 (Exhibit 1). As you can see below, the uranium price had a valiant attempt at recovering in 2010-11, but the disaster at the Fukushima Daiichi Nuclear Powerplant in Ōkuma in March 2011 caused large parts of the world to turn against nuclear power, and the uranium price has been weak ever since.

In this paper, I will argue why this could be about to change, and what investors can do to benefit. Uranium is relatively easy to trade. The Chicago Mercantile Exchange trades futures contracts, the New York Stock Exchange trades a few uranium ETFs, and a number of mining companies and other uranium-associated companies are listed on various exchanges around the world. More about that later.

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## The global map of uranium production

Kazakhstan is by far the biggest uranium producing country, accounting for over 40% of worldwide production in 2018. Canada and Australia are next with Namibia, Niger, Russia, Uzbekistan, China, Ukraine and USA completing the top 10 list (Exhibit 2).

With the uranium price currently hovering around $24/lb, most uranium producers are immensely unprofitable (Exhibit 3). Only producers in Kazakhstan and Uzbekistan make a profit at current price levels and, of those two countries, only Kazakhstan could ramp up production relatively quickly, should conditions warrant it. Uzbekistan accounts for only 4.5% of all uranium production worldwide and doesn’t have a mining infrastructure that could support a significant increase in production anytime soon. ## Nuclear in Asia Unbeknown to many, and despite the Fukushima disaster in 2011, the commitment to nuclear is still very strong in Asia where many countries continue to expand their nuclear programme. The combination of 5 billion people and rapidly rising living standards means that, for many years to come, nowhere will demand for electricity grow faster than in Asia, and that is particularly the case in China. The Chinese have decided that nuclear is the way forward with nuclear power generation capacity set to more than double over the next ten years (Exhibit 4). As of the latest count in March 2019, China has 46 nuclear reactors in operation with a combined capacity of 42.8 GWe (5-6% of total electricity generation in the country), and the intention is to increase that to 120-150 GWe by 2030 (source: Nuclear Power in China). Last year, the traditional economic powerhouses of the world, North America and Europe, accounted for more than half of all nuclear power generation capacity, but that will shrink dramatically over the next 15 years (Exhibits 5a-b). As you can see, between now and 2035, North American and European share of global capacity will shrink from 57% to 35%. Over the same period, Asia’s share will increase from 28.5% to almost 44%. A number of factors lie behind this rather dramatic shift. Following the Fukushima disaster in 2011, Germany took the most drastic step and announced that all 17 German nuclear power stations would be closed by 2022, and that strategy is still intact. Other countries reacted less dramatically, but the appetite for nuclear has undoubtedly waned in the West. Not many new nuclear powerplants are under construction anywhere whereas, in Russia and throughout Asia, a very different picture is emerging with nuclear powerplants shooting up everywhere. ## The carbon footprint When talking about the carbon footprint of different energy forms, researchers differentiate between the direct and the indirect footprint. The direct footprint includes only emissions coming from producing electricity. The indirect footprint also includes the energy needed to build those power stations and the energy required to run them. Researchers call that the embodied energy use. All the research I have come across show that the direct carbon footprint from nuclear, wind and solar is much lower than it is from all other energy forms (Exhibit 6). Having said that, supporters of fossil fuels often argue that, once you include the indirect footprint, fossil fuel-based electricity is far more attractive. A study from CarbonBrief.org from December 2017 proved this to be pure fantasy, though. As you can see from Exhibit 7 below, the study found that in conventional powerplants (e.g. coal, gas, bioenergy or hydropower), 10-20% of the lifetime electricity production is offset by the energy needed to build the plant and supply the fuel. Those numbers are reduced dramatically when the electricity is produced by nuclear, wind or solar. ## Demand prospects Consider the following facts: a. Large parts of the world are currently undergoing dramatic climate changes. b. Those changes are now statistically significant which wasn’t the case until quite recently (see Exhibit 8 which is only one example of that). c. Politicians have begun to realise that they can capture younger voters by taking this issue seriously. As an obvious consequence of those facts, the environmentally damaging impact of fossil fuels is becoming a hot issue everywhere, leading me to conclude that fossil fuels will be phased out in many countries (but not everywhere) in the not so distant future. That said, nuclear has established a bad name for itself as the result of various accidents (Three Mile Island, Chernobyl and Fukushima to mention some of the worst). However, the brutal reality is that we need a certain amount of energy to run the show every day, and that number continues to rise as living standards improve almost everywhere. Unless renewables can provide 100% of our electricity needs, and that is not going to happen any time soon, nuclear will be with us for many years to come. The biggest problem with renewables (other than cost) is the limited ability to store electricity. It can be stored in batteries only. Denmark – the country with the highest proportion of its electricity generation coming from wind (over 50%) – struggles to sell its power at a reasonable price if electricity production peaks when demand is low, e.g. in the middle of the night. Researchers are working on a project that will allow electric utilities to convert electricity to hydrogen which can be stored and then used in hydrogen-fuelled vehicles, or the hydrogen can eventually be re-electrified when needed. This research project is still in the early stages, though, and it may take many years, before a commercially viable solution is found. As I pointed out earlier, governments all over the world have declared war on climate change, and much is done to phase out fossil fuels. Whilst some traditional nuclear countries have turned decisively against nuclear, the growth prospects for the industry are still very robust. As per IAEA, in early 2019, there were 454 nuclear power reactors (plus 226 nuclear research reactors) in operation worldwide with a combined production capacity of about 400 GWe. 55 new reactors are under construction, mostly in China, India and Russia. In addition to those already under construction, over 100 reactors with a total production capacity of 120 GWe are on order in 30 different countries, most of them in Asia ex. Japan. If everything goes to plan, the global nuclear power production capacity will be in excess of 600 GWe by 2040 with almost all of the growth coming from uranium-fuelled powerplants (source: World Nuclear Association). Given the planned expansion programme, it is therefore tempting to turn bullish on the uranium price at current levels. Think of it the following way: once up and running, a nuclear powerplant becomes a captive buyer, almost irrespective of price as there is no substitute to uranium for an already existing uranium-fuelled powerplant. If, as indicated above, total nuclear power generation capacity grows from 400 GWe to 600 GWe between now and 2040, it is pretty obvious that demand for uranium will increase steadily between now and then. One final point to make regarding the inelastic demand for uranium. Should the uranium price double (say from$25/lb to $50/lb), the cost of generating electricity in a tier one US nuclear powerplant will only jump from 1.3 cents per kWh to 1.42 cents per kWh – an increase of less than 10%. In other words, even a massive jump in the uranium price should only have a modest impact on electricity prices (source: World Nuclear Association). This is due to fuel costs accounting for only a modest share of total operating expenses in a nuclear powerplant. ## Alternatives to uranium Uranium occurs naturally in the Earth's crust and is mildly radioactive in its original form. It is the only element with a naturally-occurring fissile isotope and is therefore the obvious choice of fuel in nuclear powerplants. Having said that, uranium is not the only fuel that can be used in nuclear powerplants. I said earlier that there is no substitute to uranium, but that is only correct as far as already existing powerplants are concerned – i.e. you cannot easily switch to another fuel type in an already existing uranium-fuelled powerplant. There are other fuel types, though, and thorium appears to be one of the most viable alternatives to uranium. That said, as of the latest count in early 2020, not a single operational powerplant runs on thorium. Not one! Opinions on thorium are very divided, so allow me to summarise the pros and cons. The supporters of thorium argue that it is far more abundant in nature than uranium with the largest reserves held by India (Exhibit 9). Furthermore, unlike uranium, it is not fissile on its own, meaning that the nuclear reaction can be stopped any time. Adding to that, the nuclear waste coming from thorium is less radioactive than the nuclear waste from a uranium-fuelled powerplant and, finally, the electricity output for every kg of fuel input is higher when using thorium. One the negative side, three issues stand out. Firstly, as I just pointed out, thorium is not fissile on its own, meaning that it cannot, in itself, power a nuclear reactor. It simply does not contain enough fissile material to initiate a nuclear chain reaction. Consequently, it must first be bombarded with neutrons to produce a radioactive isotope and, to do that, uranium-233 is used. One could therefore argue that a thorium-fuelled powerplant is really a uranium-fuelled powerplant in disguise. Secondly, the start-up costs are much higher. Exactly how much higher is debatable, as we do not have any thorium-fuelled powerplants in operation yet, but everybody agrees that the costs are higher. Finally, the critics argue that the concept is unproven on a commercially viable scale, and that we may still be many years away from the first successful rollout. Given the (seemingly) obvious advantages of thorium relative to uranium, you may wonder why it hasn’t been rolled out yet, and the answer is surprisingly simple. Thorium-fuelled powerplants do not produce any plutonium whereas uranium-fuelled powerplants do, and you need plutonium to build nuclear warheads. Military considerations effectively run the agenda (source: Forbes). In all fairness, I should point out that there are a few thorium-based nuclear powerplants under construction in the Gobi Desert, with India (the country with the largest thorium reserves) having a few more on order. Both China and India appear to be committed to running thorium-fuelled powerplants alongside their already existing uranium-fuelled powerplants, but it is still way too early to say whether thorium will eventually replace uranium as the fuel of choice in nuclear powerplants. The second alternative to uranium worth mentioning is the eventual introduction of fusion energy – a reverse nuclear process where you make atomic particles collide instead of splitting them as you do today. The energy generated from that process (fusion) is far superior to conventional nuclear energy (fission). Half a bathtub of seawater plus the lithium from one laptop battery will generate enough electricity per capita for over 30 years. Once fusion energy is rolled out, mankind will be able to produce almost limitless amounts of electricity at virtually no cost, hence why everything will be electrified over time. Adding to that obvious advantage, the fusion process produces only a limited amount of nuclear waste, and a fusion powerplant can be scaled up or down as required. I note, for example, that Lockheed Martin have recently patented a fusion-based nuclear powerplant to be installed onboard aircraft, allowing the aircraft to fly for months – even years – without refuelling. That said, the fusion technology is still (at least) 10-15 years away. Another concern raised by the sceptics is that unconventional uranium, particularly uranium recovered from phosphate rocks when producing phosphoric acid, is plentiful which could upset the supply/demand balance quite badly. Whilst correct that phosphorite deposits contain significant uranium resources (millions of tons), it is at a very low grade (0.005-0.015%), and the researchers at Bank of America Merrill Lynch estimate that Phosphate uranium, if all was recovered, would only increase global uranium resources by 2%. ## The Section 232 investigation For much of the first half of last year, US uranium buyers (mostly utilities) sat on the side-line, as they awaited President Trump’s decision on the Section 232 investigation into uranium imports. US utilities import about 90% of the uranium they need, and two US mining companies had filed a petition, arguing for Trump to introduce a “Buy American” policy. In mid-July last year, he reached a conclusion – no tariffs on uranium imports, he declared. The uranium price popped immediately – up about$1.50 to $26.25 – and the prevailing view at the time was that the uranium price could go significantly higher, but the opposite has happened. In the months since, the uranium price has drifted down again and is now, at$24/lb, not that far from 10-year lows.

You may wonder why Section 232 was – and still is – material as far as the global uranium price is concerned. Let me explain. US demand accounts for 22% of global demand, and global supply and demand is finely balanced. Any change in US domestic market conditions has, in the past, had a significant impact on the global market price, and that is not likely to change any time soon. For example, early last year, when US utilities held back on new purchases of uranium due to the lack of clarity on Section 232 (dipping into inventories instead), the global price weakened.

The fact that the uranium price has been weaker than expected, following Trump’s decision last July, I put down to significant stock piling all over the world – stockpiles that were established in the years following the Fukushima disaster. Average global production costs are approx. $40/lb and the incentive price to establish new mining capacity about$60/lb (source: Kitco); hence, at current price levels, most mining companies are not particularly keen to sell. Instead, utility companies have reduced their (excessive) stock levels. As those stockpiles are brought down, utility companies will find that most mining companies will not sell uranium at today’s prices, as that is a loss-making proposition.

## The demand/supply picture looking forward

Demand is relatively predictable, as electricity consumption is less cyclical than the overall economy. A nuclear powerplant is a user of uranium regardless of price, and we know that total demand for uranium, will rise for many years to come, as new power generating capacity is added to already existing capacity.

Likewise as far as supply is concerned. A decade of declining uranium prices has resulted in limited investments into new uranium mines, and long lead times will ensure that virtually no new uranium supplies will affect pricing any time soon.

As a result of that, the balance between demand and supply can be predicted relatively accurately for many years to come, and the outlook for uranium prices is very robust. As you can see in Exhibit 10 above, the uranium market is modestly over-supplied today, but that will soon change. Assuming base case (the red line in Exhibit 10), the uranium market will turn under-supplied in 2022-2023, and the undersupply will grow steadily as we approach 2030.

Should uranium prices rally sharply, as they last did in 2006-08, new mining capacity will undoubtedly be added, which will most likely bring an end to the good times; hence the importance of being a disciplined investor. Given that the average incentive price to establish additional uranium mining capacity is about $60/lb, that would be my exit level, even if prices could temporarily go much higher than that. The obvious question to ask is therefore: what could cause the uranium price to rise to$60? Longer term, the combination of rising demand from Asia and falling stock piles in the West should drive uranium prices towards $60 over the next 3-4 years. Having said that, a supply shock, for example mining closures caused by the Coronavirus, could cause that to happen much faster than that, which is why I wouldn’t wait until 2022, when the uranium market begins to be undersupplied, before investing (see Exhibit 10 again). The Coronavirus is only one of many plausible supply shocks, but I am not going to suggest it definitely will happen, as nobody knows how the next few months will unfold. One point worth mentioning, though, is that, at one stage in the last bull cycle, the uranium price was up over 6 times from the low point. At the peak, the global uranium market capitalisation was about$130Bn with over 450 mining companies supplying the global market. Today there are 40 companies worldwide supplying uranium, and the aggregate market capitalisation is under $10Bn. ## The best way to invest in uranium? As mentioned earlier, one option would be to buy futures contracts on uranium on Chicago Mercantile Exchange. Another option would be to buy one of the listed uranium ETFs. My favourite choice is probably Yellow Cake PLC, a UK company listed on London Stock Exchange. Before going any further, allow me to qualify my ‘recommendation’. Our research team have not yet conducted any work on Yellow Cake PLC but, by writing these lines, I encourage them to do so. I am intrigued because it is a pure play on the uranium price without any exploration or mining risk. The company holds U3O8 (triuranium octoxide) which is a uranium compound used by uranium-fuelled nuclear powerplants. It buys U3O8 from various mining companies and sells it to licensed uranium buyers, mostly power stations, all over the world. I happen to know that Yellow Cake PLC is not a seller at current price levels. The uranium price has held up well during the Coronavirus-related sell-off, but Yellow Cake PLC has not and is today trading at 164p, a 22% discount to its most recently stated NAV of 211p (as at 31/12/2019) when the price of U3O8 was$25/lb. Whereas electricity consumption correlates quite highly with economic growth, the relationship between the two has changed over time (Exhibit 11).

As you can see, at least in the US, less and less electricity has been required to produce a unit of GDP. This is most likely a function of the US economy gradually turning into a service economy. The practical implication of that is that, if my prediction that uranium prices could rise significantly is correct, do not expect that to have a significant impact on the economy – at least not in the US. For the same reason, although I do expect the economy to be quite badly affected by the ongoing Coronavirus outbreak, at least in Q1 and Q2, I wouldn’t expect electricity consumption to fall dramatically.

## Hedging the bet?

Given the desire in many countries to electrify most heating and transportation, there can be no doubt that, going forward, vast amounts of money will be dedicated to researching how electricity can be generated more cheaply, more safely and in a more environmentally friendly way. In that respect, thorium and lithium look like the most likely alternatives to uranium. I know a great deal more about lithium than I do about thorium, so allow me to focus on lithium for now. I can then return to thorium at a later stage.

In the very long run (10-15+ years), once fusion energy has been commercialised, uranium will most likely be completely phased out. Such are the advantages of fusion energy over fission energy, but investors in uranium have nothing to worry about for at least the next ten years.

Over the next ten years, most demand for lithium will come from the automotive industry. Lithium is a key component in car batteries, and demand for electric vehicles will grow steadily in the years to come. One could therefore argue that an investment in uranium could be complemented with an investment in lithium. Most likely, both uranium and lithium prices will do well over the next ten years but, should there be an early breakthrough in the research into fusion energy, an investment in lithium will offer a good hedge against falling uranium prices; hence I would be inclined to go long both commodities when the time is right.

What I mean by that is that market conditions are currently very poor as far as lithium prices are concerned. Cash-hungry South American suppliers are flooding the market, and the lack of disciple has done tremendous damage to lithium prices. One would need to see some level of discipline returning to the lithium market before committing any capital to that commodity.

Niels C. Jensen

18 March 2020

## Supporting Literature

Uranium: Glowing Prospects, Section 232 in Focus

Bank of America Merrill Lynch, June 2019

Electricity Use as an Indicator of U.S. Economic Activity

Vipin Arora and Jozef Lieskovsky, November 2014

##### About the Author

Niels Clemen Jensen founded Absolute Return Partners in 2002 and is Chief Investment Officer. He has over 30 years of investment banking and investment management experience and is author of The Absolute Return Letter.

In 2018, Harriman House published The End of Indexing, Niels' first book.